Section 2922)(e) - Deemed Dividend
ncvijaykumar
(Querist) 11 May 2010
This query is : Resolved
A Shareholder having substantial interest received money from the company in accordance with the family settlement in which the company is also a party to the agreement. Whether the receipt is taxable in the hands of the shareholder under section 2(22)(e) of the Income Tax Act 1961?
soumitra basu
(Expert) 12 May 2010
Company is a distinct legal entity. It was not understood how it can be a party to a family settlement.
Vineet
(Expert) 13 May 2010
Yes, it is very much deemed dividend and taxable if the conditions prescribed in section 2(22)(e) are satisfied. Family settlement does not come to help in this matter and as matter of fact if strengthens revenue's case as distribution of accumulated profits by company to shareholder to as part of settlement.
Saurabh Bansal
(Expert) 15 May 2010
I agree to the point raised by mr. basu...
Company is a separate legal entity.how can a company be a party to the family settlement.
nevertheless, If the amount given to shareholder is recoverable from the shareholder( on paper)...
i.e. if it is in the form of loan,
and the company is a private company...
the it will be deemed as 2(22)(e) dividend..
Hence,company will pay dividnd tax(Sec115O)
and shareholder will pay income tax on such dividend..
Vineet
(Expert) 16 May 2010
Mr Bansal
All large business houses family settlements invariably involve the group companies. Does somebody need to remind ongoing RIL - RNRL tussle which is product of a family settlement only. None other than Hon'ble Supreme Court has taken cognisance of family settlement in this matter and mind it,both the companies are listed ones with substantial public interest.
In closely held companies, it is a routine that the same form part of family settlements by way of adjustment of cross holding and payments.
I request you to please not oversimplify the deemed dividend provision. It is applicable for ANY PAYMENT to specified shareholder or to any concern in which he holds substantial interest. The deemed dividend has always been a issue of contention and the same is neither declared and distributed by the Company under provisions of Companies Act, tax u/s 115O is not payable by the company. Instead such deemed dividend is included in the taxable income of recipient without any exemption u/s 10(34) as no DDT has been paid on the same.
